01—Abstract
Summary
Summary of the 10-K filed March 26, 1999. Cited figures are marked; the original filing is the authoritative source.
Southwest Airlines Co. reported record 1998 results in its Form 10-K for the fiscal year ended December 31, 1998.
Consolidated operating revenues rose 9.1 percent to $4,163,980 thousanda (about $4.16 billion), operating income reached $683,611 thousand (about $683.6 million), and net income was $433,431 thousand (about $433.4 million, or $1.23 per diluted share), an increase of 36.4 percent over 1997. Management cited the highest net profit margin since 1981 of 10.4 percent and the highest operating profit margin since 1981 of 16.4 percent, and noted the company's seventh consecutive year of record annual profit. Unit costs benefited from a 26.9 percent decline in average jet fuel prices.
Operating expenses per available seat mile fell to 7.32 cents from 7.40 cents, and the company hedged 77 percent of its first-quarter 1999 and 56 percent of its second-quarter 1999 fuel needs using fixed price swaps. Capacity growth was steady, with the fleet at 280 Boeing 737 aircraft at year-end and 105 737-700s on firm order, with aggregate firm commitments of about $2.49 billionb through 2004.
Cash from operations was $886.1 millionc, capital expenditures were $947.1 million, and the company repurchased $100 million of its stock while holding $378.5 million in cash and no borrowings under its $475 million revolving credit line. The filing also flags risks including the Wright Amendment limits on Love Field service, an IRS dispute over aircraft maintenance deductions that management does not expect to be materially adverse, the phase-out of Stage 2 aircraft under the Airport Noise and Capacity Act, and Year 2000 remediation, with total costs of $11.0 million expensed to date and about $7 million remaining.
02—Key points
Key Highlights
- Operating revenues of $4,163,980 thousand, up 9.1 percent from $3,816,821 thousand in 1997
- Net income of $433,431 thousand, or $1.23 per diluted share, up 36.4 percent from 1997; a record seventh consecutive year of annual profit
- Net profit margin of 10.4 percent and operating profit margin of 16.4 percent, the highest since 1981
- Average jet fuel cost fell 26.9 percent to $.4567 per gallon, and fuel and oil expense per ASM dropped 26.1 percent
- Passenger load factor rose to 66.1 percent from 63.7 percent as revenue passenger miles grew 10.8 percent
- Capital expenditures of $947.1 million, including 22 new 737-700 aircraft and four used 737-300s; 105 737-700s on firm order
- Year-end cash of $378.5 million, no borrowings under the $475 million revolving credit line, and $100 million of stock repurchased
03—Questions
Frequently Asked Questions
How did Southwest's profitability change in 1998?
Net income rose to $433.4 million ($1.23 per diluted share) from $317.8 million ($.93 per diluted share) in 1997, an increase of 36.4 percent. Operating income rose to $683.6 million from $524.2 million, and the net profit margin reached 10.4 percent, the highest since 1981.
What drove lower operating costs in 1998?
Operating expenses per ASM decreased 1.1 percent to 7.32 cents, primarily because average jet fuel prices fell 26.9 percent. Partly offsetting this, salaries, wages and benefits per ASM rose 4.0 percent and profitsharing expense per ASM rose 16.7 percent.
What fuel hedging position did the company take?
In December 1998 Southwest entered fixed price swap agreements covering about 77 percent of its first-quarter 1999 and 56 percent of its second-quarter 1999 jet fuel needs, and it raised second-quarter 1999 hedging to 74 percent in January 1999. The company states that the fair value of these agreements was not material at December 31, 1998.
How is Southwest funding its aircraft growth and what are its commitments?
Operating cash flow was $886.1 million in 1998. Aggregate firm commitments for aircraft purchases were about $2,492.5 million through 2004, of which $715.9 million is due in 1999. The company had $378.5 million in cash and a $475 million unsecured revolving credit line, with no borrowings outstanding, and holds shelf registrations for $318.8 million of public debt securities.
What legal and regulatory risks does the filing disclose?
The company disputes an IRS notice of deficiency for 1989 through 1991 over aircraft inspection and maintenance deductions, filed in Tax Court, and management believes the resolution will not have a materially adverse effect. The filing also discusses Wright Amendment limits on Love Field service, Stage 2 aircraft phase-out requirements under ANCA, and Year 2000 remediation costs.
04—Continue